Both Candidates Are Wrong on Taxes

With each presidential debate it struck me more that both presidential candidates are wrong about taxes: wrong both in that neither man’s proposals are realistically enactable, in that they are not the correct responses to our current circumstances, and that they suggest some basic problems with their political philosophies.

McCain wants to provide a tax cut to all tax payers — though since the vast majority of real tax dollars paid by those in the top 10% of the income spectrum, the greatest savings will be experienced by “the rich”. McCain also wants to cut the corporate tax rate to bring it in line with other developed nations. And he promises to cut spending so much that he’ll nonetheless balance the budget.

Of these, balancing the budget within four years is almost certainly not possible — both because the recession will cause tax collections to fall regardless of the tax rate and also because while congress might be persuaded to enact some or even all of McCain’s tax cuts, it will certainly not allow spending cuts deep enough to balance the budget in a recession.

Cutting the corporate tax is probably a good idea. In a recession, American businesses need every possible edge in competing and creating jobs in the global marketplace. It would cause a hit to tax revenues, but it would probably be worth it.

In regards to personal income tax, however, much as I’m in favor of lower taxes it is simply not time for more tax cuts right now. We’re no longer in the 70s and 80s, and while I’d love to see lower tax rates some day, I don’t think that our current ones are hurting the economy that much, nor that cutting them further will do much to stimulate it. While I’m a principled supporter of smaller government, I think it’s time that Republicans (if we’re to regain our reputation as the party of fiscal responsibility) cease to reflexively call for tax cuts regardless of circumstances. And pragmatically, McCain’s tax cut would stand no chance with the Democratic congress anyway, even if he somehow managed to get a convincing win.

If McCain wanted to truly show his maverick/straight talk credentials, he’d take a real bite out of the budget by proposing a system whereby those above a certain income level would pay for their medicare benefits, and perhaps even means test social security. Given that those entitlements are some of our largest budget items going forward, it would be a real step towards a balanced budget.

Obama’s proposal is, I think, both more unrealistic and more dangerous — accusations which could be leveled against many of his proposals.

Obama proposes raising taxes on those earning 250k/yr and above, and also raising capital gains tax rates (thus hitting the rich, those filing business partnership tax returns as individuals, and investors) while promising a “tax cut” for everyone making less than 250k/yr. He also promises to balance the budget by taking a “scalpel” to the budget and going over it “line by line”. (Perhaps Obama does not realize that unlike the state of Alaska, the US does not have a line item veto?)

At the pragmatic level, Obama’s tax increases will simply not work very well as a means of increasing government revenues. Those in the top 5% of the income spectrum are going to be having an especially rough year this year, and anyone who comes up with capital gains this year will have worked some pretty impressive magic on Wall Street. The health of the economy is in many ways a bigger impact on tax receipts than the actual rate — and Obama’s tax hike is not actually that large a percentage increase. So even with the higher rates, he will mainly succeed in making the investor class even more defensive than they would have been anyway. Total tax receipts will go down, not up.

Almost worse, however, to my mind is what the precedent set by Obama’s “tax cut”. You see, as of now it is already the case that roughly 50% of US citizens pay no taxes. That’s why McCain’s tax cut (which really is just a tax rate cut) gives the most benefit to those who are at the top of the income spectrum. Obama’s “tax cut” is actually a tax credit. Even if you would have already got back every dollar of income tax withholding that had been taken from your paycheck during the year, Obama’s plan would provide you with additional money back. The check for your “refund” at the end of the year would be hundreds or thousands of dollars more than the total amount that had been withheld.

Now frankly, I find it a little worrying already that half the citizens of our country pay no taxes. I don’t think that it give people much of an interest in voting for fiscally responsible politicians if they don’t actually have any “skin in the game” with regards to government spending. (In that regard, it may not be entirely coincidental that under Bush the GOP has gone from being the voice of fiscal responsibility to the party of limitless deficit spending. Under Bush’s watch, the percentage of Americans who actually pay taxes has been much reduced.) Going to a system in which the rich are taxed and not only the poor but most the middle class are actively subsidized is, to my mind, even worse. And though some may accuse me of being overly cynical, I fear that this move towards subsidizing the middle class out of the pockets of the top 5% is more an attempt to gain a larger and more permanent constituency for the Democrats among the middle class than it is a serious attempt to relieve economic adversity. I fear this may take us one more step away from “government by the people, for the people” and towards “government for the people, by the elites”.

Even if you would have already got back every dollar of income tax withholding that had been taken from your paycheck during the year, Obama’s plan would provide you with additional money back. The check for your “refund” at the end of the year would be hundreds or thousands of dollars more than the total amount that had been withheld.

It’s already that way. I receive a refund of thousands more than I put in, in large part to Bush’s “tax cuts for the rich”. It’s both a good thing and a bad thing. It’s good in the sense that it helps keep lower income families in the game, so to speak, rather than in the desperate cycle of the public dole. Bush’s cuts gave more relief to larger families like mine – though I’d rather see more proportionality in that regards. I don’t necessarily view it that 50% of the people don’t pay taxes. I know you were referring to federal income taxes, but the reality is that everyone pays taxes. It may not be a right or wise way of doing it but the current scheme merely serves to offset some of the tax burden that low income already bear (gas taxes, utility taxes, property taxes [very punitive in some communities], sales tax, state income tax [even some cities have income tax – Detroit taxes your income if you live in the city and all who work in the city, meaning a double hit if you dare live and work there], and let’s not forget insane tobacco taxes, which like the lottery are taxes directed at the poor who have little of anything but to look for some simple pleasure to cope or a gamble for hope.

It would seem to me that if we’re going to have a progressive income tax, the standard deductions should be far higher, giving everyone, rich and poor alike a certain threshold of untaxed income.

Means testing Social Security has benefits and could be just, but I don’t trust the same people who have made it insolvent to do something wise and just. First step I’d like to see with Social Security/Med would be to remove the cap on the base contributions and perhaps create a threshold before employee contributions actually kick in (the numbers would have to be crunched). I’m not a class warfare kind of guy, and don’t like to see anybody soaked, but to keep contributing 7.65% of your wage after $100 K a year doesn’t seem over the top to me and if as a society we’re going to consider SS a good thing, we should do it wisely.

On the other hand, capital gains taxes shouldn’t be punitive (certainly shouldn’t be taxed higher than your income tax bracket and should have inflation factored in – a long term investment may appear to have a huge gain, but could be an actual wash due to inflation). The idea of an inheritance tax strikes me as outright criminal.

Still, the problem is that we let the government get too big and screw too many things up. Policies should be made that direct the order of things to desirable outcomes (less burden and assistance of the poor and low income, more of the burden for those who can bear it), rather than merely soaking one person to hand it over to another while skimming off the top to administer it and perpetuate the cycle.

Good point on other taxes — I’d been trying to explicitly say “income taxes” since that’s what’s been in play, but I missed a few instances — and as you say: everyone pays payroll, gas, sales, etc. taxes.

I would have no problem with taking the cap off payroll taxes, and perhaps putting in a floor where the first 2k/mo or something aren’t taxed at all. I know there’s the theory out there that social security and medicare are social services that everyone pays for rather than a welfare/safety net function (and thus the idea of everyone paying alike) but it seems it’s well past time we admit that was pretty much always a fiction.

Given that social security was all “invested” in the government loaning itself money to spend on other things, we ought to go ahead and develop a slightly more progressive way of funding it just like other government programs, and make it clear that those who are able are expected to fund their own retirements.

I take your point, Rick, that there are already refundable tax credits via the child tax credit. (I had two years where I got more money back than I put in, and that was with only one and two kids.) However, it strikes me that Obama’s proposal takes things in a significantly worse direction on that, given that he wants to simply issue a credit of $500 per adult, plus other credits for child care and college and such. I’d rather see a move dispense with the tax credits and exemptions for children and instead do income tax on the basis of per capita household income (divide the total household income by the number of members). That would provide a significantly greater benefit for parents of dependant children, and more accurately reflect the real costs people are dealing with.

By the way, my understanding is that Obama isn’t proposing to give a $500 tax credit to every adult so much as he’s proposing to keep that credit from going away when the Bush tax cuts expire. The tax credit, in other words, is already in existence, and Obama’s plan counts this as a “cut” only by treating the expiration of the Bush tax cuts as a baseline, rather than a tax increase.

I think Obama has a lot of other refundable tax credits for things like energy efficiency and college education (from $2000 to $4000).

I sympathise with your arguments about how everyone should pay taxes, but don’t you think income inequality makes that not very feasible? The median household income doesn’t provide all that much room for taxes if your paying rent/mortgage payments, kids’ college or your own student loans, payroll tax for two income earners, and trying to save a little money.